Debt Ceiling Impasse: US AAA Credit Rating May Be Downgraded By Fitch

Fitch’s announcement is “a bit of a slap” to the negotiators from the White House and the Republicans, said Tony Sycamore, an analyst at IG Australia Pty Ltd

Fitch Ratings said it may downgrade the US’s AAA credit rating due to worsening political standoff that’s preventing a deal to solve the nation’s debt-ceiling crisis, Bloomberg reported. According to the report, the warning is due to the increased partisanship that is hindering a resolution to raise or suspend the debt limit despite the fast-approaching so-called X date, the ratings company said in a statement, referring to the point at which the government runs out of cash. It moved the US to “rating watch negative” under its classification system.

The yen, a traditional haven currency, spiked as traders reacted to the news before paring gains. Benchmark Treasury yields edged lower in early Asia trading Thursday.

Markets have been showing increasing signs of concerns over the standoff, with rising premiums on bills maturing when the risk of default is highest while the S&P 500 Index has declined for two days.

Fitch’s announcement is “a bit of a slap” to the negotiators from the White House and the Republicans, said Tony Sycamore, an analyst at IG Australia Pty Ltd. in Sydney. “It just adds urgency that these two guys get together, or these two parties get together because their lack of action is making the ratings agencies nervous, and i think the markets are very nervous as well.”

Economists project a US default could trigger a recession, with widespread job losses and a surge in borrowing costs. Still, it’s not unusual for Congress to strike deals at the last minute when the pressure becomes big enough to force negotiators to make painful choices.

In 2011, S&P Global Ratings drew fire for downgrading the US from AAA after a similar brush with default. That spurred a selloff in risk assets like equities around the world, but boosted Treasuries as investors sought out havens.

“We believe risks have risen that the debt limit will not be raised or suspended before the X-date and consequently that the government could begin to miss payments on some of its obligations,” Fitch said in its statement. “Prioritization of debt securities over other due payments after the X-date would avoid a default.”

S&P has retained a stable outlook on the rating during the latest fracas, anticipating a deal will be struck.

The Fitch warning is “certainly very symbolic, and in a way it may force Moody’s to follow suit,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “It will also place more scrutiny on the dollar and Treasuries as havens and its risk-free rate qualities.”